Move Over Ethanol, Market Forces Favor CNG as a Gasoline Replacement

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Move Over Ethanol, Market Forces Favor CNG

Posted March 16, 2011

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Posted March 16, 2011 on Ed Dolan’s Econ Blog http://dolanecon.blogspot.com

The Search for the Fuel of the Future

The US government has spent billions in the search for the elusive “fuel of the future” that will be clean, cheap, and made in America Ethanol Hydrogen fuel cells Nuclear fusion

Meanwhile, few have noticed a humble, off-the-shelf technology that is all of these things, and is available right now: compressed natural gas (CNG)

A Hydrogen Fuel PumpHydrogen has been touted as the “fuel of the future” but it is decades away from widespread use.Photo source: EERE http://commons.wikimedia.org/wiki/File:Hydrogen_fueling_nozzle.jpg



CNG: The Fuel of Now

More than 100,000 buses and delivery vehicles in the United States run on CNG

CNG emits less carbon than any other fossil fuel and fewer of the gases that cause local air pollution and smog

Many individual consumers have converted cars, pickups, and SUVs to CNG or use of dual fuels

Honda is the only manufacturer that sells a street-ready CNG vehicle in the US (the Honda GX)

A CNG Powered Bus in Arlington, VAPhoto source: Mario Roberto Duran Ortiz, http://commons.wikimedia.org/wiki/File:CNG_buses_Arlington_Transit_ART_07_2010_9541.JPG



CNG Around the World

Although the United States is one of the world’s largest producers of natural gas, it lags behind in use of CNG as a transportation fuel

According to industry source NGV Global, the United States ranks 14th in use of this reliable and proven technology


http://www.iangv.org/tools-resources/statistics.html


Barriers to CNG: Filling Stations

CNG suffers from a “chicken and egg” problem—demand for vehicles is low until there are more filling stations, but supply of filling stations is low until there are more vehicles on the road

There are about 1,000 CNG filling stations in the US now, but only about half of them are open to the public

The biggest number of stations are in California. Other clusters are found in New York, New Jersey, and the Washington, D.C. area

Picture source: http://commons.wikimedia.org/wiki/File:CNG_pump_DCA_07_2010_9833.JPG



Barriers to CNG: Conversion Cost

Almost any vehicle can be converted to CNG or dual fuel use, but strict EPA regulations keep the cost of conversion extremely high, up to $20,000 or more per vehicle

Non-certified kits cost as little as $1,000 but installing them is considered to constitute illegal tampering with a vehicle’s emission system

Legislation has been introduced to simplify the certification process, but it has not yet passed

Clean energy tax credits offset only part of the high cost of regulatory barriers

Almost any vehicle can be converted to CNG. NGV America maintains a business directory of conversion kits and installershttp://www.ngvc.org/buz_dir/index.html

Photo source: http://commons.wikimedia.org/wiki/File:Carroagas.jpg


Market Forces Now Favor CNG

New discoveries of unconventional natural gas (shale, tight sands, coal-bed methane) have increased supply

Growth of demand and political disturbances in the Middle East have sent oil prices upward

Result: The gap between natural gas and oil prices is now the greatest on record

Follow this link to view a more detailed graph showing trends in oil and natural gas prices


Short-Run Market Reaction

The figure shows how the market for CNG vehicles (CNGVs) reacts in the short run to a lower price for natural gas

CNG fuel is a complement to CNGVs, so the demand curve shifts to the right

The market moves up and to the right along the supply curve to a new equilibrium at E1 where more CNGVs are sold and the price of CNGVs rises


Long-Run Market Reaction

In the long run, supply is more elastic, because there is time for regulatory barriers to be overcome and for new suppliers to enter the market

Long-run demand is also more elastic, because more CNGVs on the road will make fuel more widely available

As a result, the long-run market equilibrium will look more like E2 than E1, and the total quantity of CNGVs sold will increase more strongly


The Best Hope for CNG

The best hope for CNG is probably a market-driven, bottom-up approach rather than a top-down legislative breakthrough

Low CNG prices will gradually lead to more fleet vehicles and private conversions

More vehicles on the road will bring more CNG filling stations

More vehicles plus the price advantage will create pressure for more favorable regulation

Eventually, the US may catch up with Bangladesh in use of this fuel of the future

Move Over Ethanol, Market Forces Favor CNG as a Gasoline Replacement

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